Educational Articles

Emerging Challenges for Google

Lester Ratcliff
| February 22, 2010

Capitalizing on its position as the operator of the world’s largest Internet search engine, Google (GOOG) dominates the market for online advertising. That powerful advantage has enabled the company to generate rapid growth in revenues and earnings, and to expand into other attractive markets, including smartphones. However, Google is beginning to face some new challenges, as it starts to fight with new competitors in new markets.

Round 1: Google vs. China

Search engine giant Google has delayed the launch of its two new mobile phones in China, because of problems associated with recent cyber attacks on the company’s e-mail service. Google had planned to introduce Android-based handsets from Motorola (MOT) and Samsung Electronics through China Unicom, a large telecommunications company in China. But because of all the negative publicity surrounding Google and its dispute with the Chinese government over hacking and censorship, the company has decided to postpone the launch. Google apparently thought it would be very difficult to provide new mobile phone users a positive experience in a market that was compromised by political and economic uncertainty.

In January, Google threatened to terminate its search engine in China following a sophisticated cyber attack originating in China that resulted in the theft of intellectual property from the company’s servers and the targeting of Chinese dissidents’ e-mail accounts. Now, Google no longer wants to censor its Chinese Google.cn search site, and is attempting to find a way to offer a legal, uncensored and unfiltered search engine in China. However, the Chinese government takes a different approach to the matter, explaining that foreign firms should respect China’s laws and regulations, including explicit rules on what information should be prohibited on the Internet. Google opened its Chinese-language search site in 2006.

Google has added a number of new smartphones to its line-up of Android-operated mobile devices, including Motorola’s Droid and the Nexus One, which was designed by Google itself. The Android operating system is software that tightly integrates Google’s various search, mapping, and information services. So any action to shut down its search engine could also affect the functioning of Google-powered phones.

Actually, Android-based mobile phones are already in use in China. The OPhone from China Mobile and the Mini 3 from Dell (DELL) were introduced in late 2009. And since China has an estimated 700 million mobile phone users with the prospect of further rapid growth in the future, the Chinese market should be a material part of Google’s long-term business strategy. Consequently, although the current troubles in China may interfere with Google’s global mobile phone expansion plans in the near term, the Chinese market is probably too important economically for Google to pass up for political reasons. In the long run, we think that Google will work out its differences with the Chinese government.

Round 2: Google vs. Apple/Microsoft

Reflecting the realization that Google has now become its primary competitor, Apple (AAPL) is reportedly talking to Microsoft (MSFT) about replacing Google as the default search engine on its iPhone. Currently, Google collects revenue from advertising placed next to its search results, and shares a portion of that with Apple. Most mobile advertising is viewed on Apple devices, including the iPhone and iPod touch. In the negotiations, Microsoft may offer to share a larger portion of its revenue or pay a higher flat annual fee than Google does. That would help Microsoft gain some share of the fast-growing mobile search market, which is dominated by Google. According to recent research, people used
Google 86% of the time, Microsoft’s Bing search engine 11%, and Yahoo! (YHOO) 3%. No matter what developments transpire in the short term, it is entirely possible that Apple could eventually design its own search engine to capture advertising. In that case, Google and Microsoft would continue to use their search software to manage advertising on their own smartphones, and mobile search would become a three-way contest.

Round 3: Google vs. Yahoo!/Microsoft

Yahoo and Microsoft recently received regulatory approval to proceed with a search partnership intended to challenge Google. The broad intent of the deal is that Microsoft’s Bing search engine will process search requests and related advertising on Yahoo! web sites. According to a 10-year agreement, Yahoo! will receive 88% of the revenue generated from the advertising placed next to the search results. While the process of shifting Yahoo’s search platforms to Microsoft may take one to two years, the partnership should eventually improve competition in the market and maybe even put a minor dent in Google’s dominance. Currently, Google processes approximately two-thirds of global search requests, while Yahoo! handles 7%-8%, and Microsoft about 3%. While a Yahoo!/Microsoft tie-up doesn’t come near Google’s market share, it does present a more compelling competitive challenge.

Life is Hard at the Top

Google is clearly at the top if its game right now and everyone knows it. That’s one of the main reasons why everyone is gunning for a fight with the king of the hill. The three instances noted above are only the tip of the iceberg. Of course, Google’s attempts to expand its business beyond its home turf isn’t helping its image with its competitors, some of which used to be close allies. The winner of each of these fights is up in the air, but one thing that isn’t is the fact that Google will continue to face tough competitors looking to unseat the heavy weight champ.